Empirical analysis of the effects of R&D on productivity: Implications for productivity measurement?

This paper provides an overview of a study by Productivity Commission staff that sought to quantify the effects of domestic and foreign R&D on Australia’s productivity performance. The estimates obtained were sensitive and imprecise and standard models were shown to be mis-specified. The use of capitalised R&D expenditure to proxy knowledge stocks is one possible contributor to the estimation problems. The paper goes on to discuss the (Canberra-II Group) proposals to capitalise R&D in countries’ national accounts. Treating R&D expenditure as an investment, rather than as an expense, is conceptually sound. But there are flow-on implications for the measurement of productivity in the national accounts. Uncertainties about representing R&D outputs by R&D expenditure and stocks of knowledge by a PIMbased accumulation of R&D expenditure cast some doubt on whether capitalisation of R&D in the national accounts would add meaningfully to current productivity estimates. The issue warrants further contemplation and investigation. ∗ PO Box 80 Belconnen ACT 2616 Australia. Email: [email protected]. The author is grateful for assistance and comments from Sid Shanks. Helpful feedback and comments were also received from Ian Bobbin, Ralph Lattimore and Jonathan Pincus. Remaining errors and omissions are his. The views expressed are those of the author and should not be attributed to the Productivity Commission.